Transferring goods between inventory sites is a common business practice for most all companies. Goods are often comprised of sub-assemblies of smaller items, which must be transferred from one inventory site to another in the process of manufacturing and distributing the goods. As such, the appropriate valuation and analysis of transferable item costs has become a key factor in successful business management. Although several costing methods exist, absorption costing is commonly used.
Absorption costing is an approach to inventory valuation that involves assigning a cost to each transferable item in inventory, where the cost is determined by summing the value of the items transferred and any freight or other charges incurred as a result of the transfer. Most all companies use computer software to perform the absorption costing analysis for transfers between various inventory sites, which commonly refer to inventory sites as “cost groups.” The software will perform the necessary operations to determine the average cost of the item at both the transferring and receiving cost groups. Although the number of operations may be relatively few in simple scenarios, the manufacture and distribution of a good often creates more complex scenarios where many items are transferred between many different locations. Consequently, the number of operations that the software must perform in these more complex scenarios may become very large.